Will Sprint Get Left In The Dust By This Merger?

In the wireless business, size matters. Verizon Wireless — owned by Verizon (NYSE:VZ) and Vodafone (NASDAQ:VOD) — is the largest in the United States. Combined with number two AT&T (NYSE:T), 70 percent of the market is spoken for in what some are calling a duopoly. Faced with being crushed by size, smaller carriers are evaluating options for growth.

“The problems that Sprint and T-Mobile have are that they’re not as big as AT&T and Verizon,” said Chris Larsen, an analyst at Piper Jaffray, to Bloomberg. “They don’t have the scale so therefore it’s harder to compete.”

According to Bloomberg, Deutsche Telekom is considering merging its T-Mobile division with MetroPCS (NYSE:PCS). The move would send $1.5 billion in cash to MetroPCS shareholders while Deutsche Telekom took a 74 percent stake. The new entity would operate under the T-Mobile name. AT&T recently backed away from a bid for T-Mobile in the face of U.S. regulatory scrutiny.

A bigger T-Mobile could become a serious sore spot for competitor Sprint Nextel (NYSE:S). Sprint boasts 56.4 million subscribers, and the new T-Mobile would claim about 42.5 million. Sprint’s options for growth-by-merger are now a much larger T-Mobile, or Leap Wireless (NASDAQ:LEAP), which would be easier to swallow. Shares of Leap closed up 8.4 percent on October 2 because of speculation. The company has 5.9 million prepaid subscribers.

Sprint has seen massive growth so far this year, doubling its share value, but took a hit when news of the possible T-Mobile-MetroPCS merger came out. Despite the blow, and possible complications because of the change in competition, investors still have faith. Zack Shafran, a money manager at Waddell & Reed Financial, said that “The reason we’re investors in Sprint today and for the foreseeable future is the fact that they’re running business better. Importantly, we think that’s their top priority.”

Sprint tried to buy MetroPCS earlier this year, but the board rejected the transaction.